NEW BRANCHES OF AUDITING

Class: xii marks:15

There are four branches of auditing:

1. Cost Audit

2. Management Audit

3. Performance Audit

4. Social Audit

Q1. Define Cost audit.

Ans:- Cost audit is the independent verification of cost record maintained in manufacturing industries. It is
conducted with a view to ascertain whether cost records of the company are being maintained as per cost
accounting principles, plan and procedure. The cost auditor verifies the cost statement and gives report on
true and fair view of cost of production. The cost auditor also highlights the area of inefficiency and
wastages.

Q2. What are the objectives of cost audit?

Ans:- The following are the objectives of cost audit:

1. To see whether there is any error of principles in cost accounting and fraud committed in cost
accounting.

2. To check whether the total cost of each product have been correctly ascertained.

3. To verify the correctness of record, events and transaction in cost records.

4. To help the management by bringing their notice to inefficiency and wastages in the use of man, money,
material and machine.

5. To see that data and information furnished to various government agencies are authentive and reliable.

6. To see whether any undesirable practices has been adapted by the management.

7. To render suggestion to the management for improvement in performance.

8. To check overall working of the cost accountant.

Q3. What are the advantages of cost audit?

Ans:- The advantages of cost audit is as follows:
i. Increasing Productivity:- Cost audit highlight wastages and inefficiency in the manufacturing operation of
business. This audit is an improvement in the productivity level of the business.

ii. Decision Making:- Cost audit provides important data and on the basis of such data management can
take various decision such as make or buy products, pricing policy.

iii. Customers Benefits:- Effective and efficient cost audit decrease the cost of production and reduce the
price of the product which provides benefit to the customers.

iv. Creation of employment opportunities:- By eliminating wastages and generating additional fund, cost
audit helps to make new investment which is the need of the country for solving the present
unemployment problem.

v. Setting of Standard:- The audited cost can be used by association of various industries for compiling
standard cost of the product against which the individual firm may compiler than actual cost.

vi. Provide help to government:- cost audit helps the government to take necessary measures to improve
the efficiency of sick industrial units.

vii. Help to shareholders:- The cost audit enables shareholders to determine whether or not they are
getting fair return on their investment. It reflects managerial efficiency or inefficiency.

Q4. What are the disadvantages of cost audit?

Ans:- The following are the disadvantages of cost audit:

i. Unnecessary Disturbance:- It create disturbance in the normal working of the company.

ii. Duplication of work:- It leads to the duplication of work because large are of working of financial and
cost audit are same.

iii. Burden of Additional cost:- It may be considered as burden to the company because of the additional
cost incurred on the cost audit.

iv. Confidentiality:- Conduct of cost audit by the outsider may be harmful to the interest of the company
as the confidentiality of cost accounts may not be maintained.

v. Non- availability of fixed standard:-Accounting procedures vary from business to business and thus
there is no fixed standard available before the auditor while conducting cost audit.

Q5. What do you mean by Management Audit?

Ans:- Management audit is an audit which review the management plans, procedures and policies.
Management audit deals with the assessment of efficiency and soundness of management to leads the
business to its goals. It also checks the interest of the management towards the shareholder of the
company. It reviews all aspects of management performance.

Q6. Discuss the objectives of Management Audit.

Ans:- The objectives of management audit is given below:
i. To see whether the company is being running efficiently or inefficiently and to verify the performance of
of management.

ii. To see whether the management audit is concerned with soundness and efficiency of management plan,
procedures and policy or not.

iii. To maximize the profit of an organization and minimize the loss of the business by pinpointing
management deficiencies in various areas. ( for this reason management audit is done).

iv. To help the management in getting subsidies and loan.

v. To protect the interest and benefit to the shareholder of the company.

vi. To identify the overall objective of an organization.

Q7. What are the advantages of Management audit?

Ans:- The advantages of management audit are discuss below:

i. Review of plans, policies and procedures:- Management audit review the plan, policies and procedure
and determine their effectiveness in attaining goal of the enterprise.

ii. Performance evaluation of management staff:- It evaluate the performance of management staff
holding various key position.

iii. Correction of plan, policies and procedures:- Management audit suggested how to rectify the defective
plans, policies and procedures, so that goal of the enterprise can be achieved.

iv. Increase overall efficiency:- By increasing overall efficiency the profitability of the business can be
improved and hence return of shareholders can be maximized.

v. Fine specific Problem:- It enable the management to find specific problem areas where managers are
unable to come out with fruitful solutions.

vi. Provide adequate measures:- It provide adequate measure for the extent to which the current
management controls are effective.

Q8. What are the disadvantages of Management Audit?

Ans:- The disadvantages of management audit are given below:

i. Decrease in worker’s enthusiasm:- With the help of management audit past performance of the
employees are evaluated and if any little deviation occurs, adverse criticism are made. This leads to hinder
the constructive thinking of those employees.

ii. Reluctant in introducing new system:- The management personal become dreaded of facing adverse
criticism. So, they are reluctant to introduce new system for increasing production. As such, they intend to
pay more attention to the preservation of books of accounts and other documents in case of adapting new
methods.

iii. Costly System:- This audit system appears to be very costly. The large concerns are able to adapt
management audit rather than the small ones.
iv. Excess Time consuming:- Generally management audit gives more concentration on maintaining books
of accounts rather than concentration on other factors. So, it consumes time of management.

v. Theoretical:- Management auditor cannot understand the practical problems. So, the suggestions
provided by them are theoretical but not practical. This might also lead to a conflict between organization
of the management as a whole.

Q9. What is Performance Audit?

Ans:- Performance audit can be defined as a systematic and independent evaluation of the performance of
the business in its various key areas like man power planning, machine, work load distribution etc. So,
performance audit is not concern with verification of books of accounts of the business. The auditor
conducting performance audit not required to report on reliability and fairness of the financial statement
rather its objectives is to enable the management to improve the performance of the business in different
key areas.

Q10. What are the objectives of Performance Audit?

Ans:-The following are the objectives of performance audit:

i. To ensure proper man power planning and work load distribution.

ii. To review to performance of key personals of the organization.

iii. To identify those areas responsibility for low productivity and profitability.

iv. To see that quality of the product is as per requirement of the market.

v. To see that assets of the business are being properly utilized.

vi. To Improve profitability of the business.

Q11. Discuss the advantages of performance audit?

Ans:- The advantages of performance audit are given below:

i. It helps to improve the productivity and profitability to the business.

ii. It evaluates the performance of all departments separately.

iii. It helps to check the quality of the product.

iv. It helps to review whether the business has been able to reach its target and achieve its standard level
of performance.

v. It helps the management to exercise proper control so that the business can run efficiently and
competitively.

vi. It helps to detect defects and limitation in plan budget and standard.

Q12.what are the disadvantages of Performance Audit?

Ans:- The following are the disadvantages of performance audit:
i. Performance audit is a very costly nature of audit.

ii. It scope of performance audit is very limited.

iii. It is applicable to large organization rather than small ones.

iv. It creates unnecessary disturbance in the normal working of companies. Hence, it is a very time
consuming.

v. It is a post-mortem audit i.e. examination of the events of what have already been occurred.

vi. It create unhealthy atmosphere in the organization due to competition among the employees in
achieving the desired goal.

Q13. Define Social Audit.

Ans:- Social audit can be defined as the evaluation of the social performance of the firm in the society to
which its belongs. Social audit is not concerned with reliability and fairness of the financial statement
rather its objective is to see whether the society is being compensated by the firm or not.

Social audit is a new concept and has emerged out of growing awareness of the responsibilities of the
business towards the society.

Q14. Discuss the objective of social audit?

Ans:- The following are the objectives of social audit:

i. To check whether the investment of shareholder is safe and secured and whether the shareholder got
adequate return on their investment.

ii. To check whether the interest of customer is duly protected or not.

iii. To check whether taxes to the government has been properly paid or not.

iv. To check whether interest of the workers are duly protected by the firm or not.

v. To check whether the fair trade practices are being adapted by the firm or not.

vi. To check whether interest of creditors and investors have been duly protected by the firm or not.

Q15. What are the advantages of Social Audit?

Ans:-

i. It helps to see that the relationship between the employer and employee is good.

ii. It reduces the cost of production and Improve the quality of product.

iii. It control pollution and reduce environment hazards.

Q16. Discuss the disadvantages of Social audit.

Ans:- The following are the disadvantages of Social audit:
i. The scope of social audit is very limited.

ii. It does not help to achieve specific goals.

iii. It is very costly in nature.

iv. It is applicable only to large scale organization rather than small ones.

v. It creates unnecessary disturbances in the normal workings of the business.

Q17. What are the difference between cost audit and management audit?
Ans:- The following are the differences between cost audit and management audit:

Basis COST AUDIT MANAGEMENT AUDIT

Meaning It is the verification of the It is the examination of soundness and effectiveness
correctness of cost records. of the management.
Objective The main objective of cost audit is to Its main objective is to see whether the company is
ascertain the truth and fairness of being running efficiently or inefficiently.
cost records.
Report The report of cost audit is submitted The report of management audit is submitted to the
to central government with a copy to management.
management.
Qualification The cost audit shall be done by the Management auditor need not necessary to be a
cost auditor as per Companies Act qualified cost accountant. A person with special
1956/2013. He must be a cost ability and knowledge can conduct management
accountant within the meaning of audit.
institute of Cost & Work Accountant
of India (ICWAI) 1959.
Period Cost audit, if ordered by the central It is not done for any such fixed period. It may cover
government, is to be conducted for from one to three or four year.
the particular year specified in the
order.
Cost It is more expensive. It is less expensive.

Q18. Write the difference between cost audit and performance audit.
Ans:- The difference between cost audit and performance audit are given below:

Basis COST AUDIT PERFORMANCE AUDIT

Meaning It means verification of cost record It means systematic evaluation of the performance
of the organization. of business in various key areas.
Applicability It is applicable only in manufacturing It is applicable in any kind of organization such as
industry. manufacturing industry, trading & financial
industries.
Qualification It is done by the cost accountant. It is done by the internal staff of the management.
Objective Cost audit is mainly concerned with It covers all important function of the organization
production function of the such as production function, purchase and
organization. administration function etc.
Purpose Cost audit is the verification of the It examines the performance of the organization in
correctness of cost records. various areas like man power, job performance,
 profitability etc.
Report The report of the cost audit is The report of performance audit is submitted to
submitted to the central the management.
government with a copy to the
management.
Cost It is more expensive. It is less expensive.

Q19. Discuss the difference between cost audit and financial audit.

Ans:- The difference between cost audit and financial audit is discuss below:

Basis COST AUDIT FINANCIAL AUDIT

Meaning It is a systematic and independent It is a systematic and independent examination of
examination of cost record of the the financial information of the business.
organization.
Qualification It is conducted by qualified cost It is conducted by the Chartered Accountant
accountant with the meaning of within the meaning of I.C.A.I 1949.
I.C.W.A.I 1959.
Purpose It is mainly conducted in It is generally conducted in all type of organization.
manufacturing industries such as
automobile and coal industry.
Cost It is more expensive than financial It is less expensive than cost audit.
audit.
Types It includes fixed asset audit, It includes statutory audit, continuous audit, non-
production audit, physical verification statutory audit.
of assets etc.